By Dana Anspach. Money Over 55 Expert
Dana Anspach has been About.com's MoneyOver55 Expert since 2008. She is also a contributor to MarketWatch as one of their RetireMentors .
Dana is the founder of Sensible Money, LLC, a fee-only (meaning they sell no financial products for a commission) professional services firm which offers retirement income planning and investment management services.
You can follow Dana at Sensible Money on Facebook or Twitter where you'll find more free content and conversations.
You can also watch one of her recorded classes on YouTube called The Key to Retirement Success .
Like financial planners, investment advisors must understand your financial goals; knowing when you will need to use your money, and what you will be using it for.
To give good advice an investment advisor must gather personal and financial data about you. They must understand your tolerance for risk and your expected rate of return on your investments.
They will use this data to analyze your existing investments, and make recommendations about what you should do going forward.
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What type of advice can an investment advisor give me?
A good investment advisor will tell you:
- What to invest in
- Whether to buy stocks or mutual funds
- If you should use index funds or active fund managers
- Which investments to use inside of your retirement accounts
- What risks are associated with each investment
- What expected rate of return you might receive from your portfolio
- Which investments you should own in non-retirement accounts
- What types of taxable income your investments will generate
- How you can rearrange investments to reduce taxable income
- What taxes you will incur when you buy or sell investments
How do investment advisors charge?
Most investment advisors charge a fee that is a percentage of assets that they manage on your behalf. This
fee is usually higher for smaller accounts, and lower for larger accounts. A general range would be two percent a year on the high side, down to a half of a percent a year on the low side.
Instead of, or in addition to asset management fees, some investment advisors may charge in any of the following ways:
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- An hourly rate
- A flat fee to complete a review of your existing portfolio
- A quarterly or annual retainer fee
- Commissions paid to them from financial or insurance products you buy through them
- A combination of fees and commissions
Read 6 Ways Financial Advisors Charge Fees for additional details on all of the above fees.
How can I know how my investment advisor will be paid?
Always ask an investment advisor for a clear explanation of how they will be compensated. The best advisor will give you a plain English explanation that you can understand. Every investment advisor is also required to provide you a disclosure document called an ADV PART TWO. This document discloses their compensation formulas and any potential conflicts of interest.
A good investment advisor:
Will not: make recommendations until they understand your expected time horizon, your level of experience with investments, your goals, and your tolerance for investment risk.
Will: Want to know where all your investments are so that your portfolio as a whole will make sense. Otherwise you may end up owning the same type of investments in different accounts. To make it easier to locate a good investment advisor,
Do investment advisors also offer financial planning advice?
Some investment advisors offer basic financial planning advice, and a few offer comprehensive financial planning as well as investment advice. Investment advice is different than financial planning .
Ask a potential investment advisor if they offer financial planning services, and if those services are included in their fee.